How Fragile Is South Africa?

In a recent piece for Foreign Affairs, Nassim Nicholas Taleb (risk expert and author of ‘The Black Swan’ and ‘Antifragile’) and Gregory F. Treverton wrote an article in which they set out some criteria for broadly measuring the fragility of any state.

There is in our country, for the first time in many years, a sense that the future will not be brighter than the present. Taleb’s fragility test is very applicable to the South African situation, as it gives an adequate framework for a summarised political and economic analysis.

An excerpt from the article:

Thus, instead of trying in vain to predict such “Black Swan” events, it’s much more fruitful to focus on how systems can handle disorder—in other words, to study how fragile they are. Although one cannot predict what events will befall a country, one can predict how events will affect a country. Some political systems can sustain an extraordinary amount of stress, while others fall apart at the onset of the slightest trouble. The good news is that it’s possible to tell which are which by relying on the theory of fragility. 


Simply put, fragility is aversion to disorder. Things that are fragile do not like variability, volatility, stress, chaos, and random events, which cause them to either gain little or suffer. A teacup, for example, will not benefit from any form of shock. It wants peace and predictability, something that is not possible in the long run, which is why time is an enemy to the fragile. What’s more, things that are fragile respond to shock in a nonlinear fashion. With humans, for example, the harm from a ten-foot fall in no way equals ten times as much harm as from a one-foot fall. In political and economic terms, a $30 drop in the price of a barrel of oil is much more than twice as harmful to Saudi Arabia as a $15 drop.

For countries, fragility has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks. Applying these criteria, the world map looks a lot different. Disorderly regimes come out as safer bets than commonly thought—and seemingly placid states turn out to be ticking time bombs. 


1. A centralised decision making system

We live in a country, where sadly many South Africans have a natural affinity for socialism, and favour the notion that it is the role of the government to solve problems and address inequalities. In this case, the basic ideologies of those in government, and that of the majority of voters conveniently align. Virtually all major national policies are decided by the top 6 in the National Executive Committee, the effective politburo made up of the ANC elite. The number one criterion when appointing ministers and other senior officials are loyalty, unbending loyalty to the president, and to the party.

Government is a very complex system. When its size doubles (measured by staff, budget etc.), the inherent complexity of the system doesn’t double, it far more than doubles. In this case, the relation between size and complexity is non-linear. To paraphrase the analogy Taleb uses in his book Antifragile, that of a car crashing, he asks: “what causes more carnage, a car crashing into a wall once at 100 km/h, or a car crashing into a wall 100 times at 1 km/h?” A larger government is more prone to be negatively affected by shocks precisely because it is more complex. There is a larger risk of contagion within the system, the dominoes are in effect placed closer together. When there is a shock, the falling dominoes trigger the rest to fall.

The majority of provincial funding comes from national government, as do most of the provincial appointees. Provincial governments have fairly little autonomy (apart from the opposition run Western Cape). There is no mass involvement in the political process for the average person apart from placing a ballot marked with an X in a box once every five years. In South Africa, we have no congressmen, senators or local constituency MPs to contact in the case of grievances. Hence, the whole government is more centralised, the dominos are stacked closer together.

“Democracy is the road to socialism” – Karl Marx

2. A diversified economy

South Africa has never had a truly diversified economy. During the apartheid years, South Africa had thriving mining and agriculture sectors, with the economy largely resource driven. Today, mining has largely been decimated by government policies. Firstly due to the over wielding bargaining power of unions, and the reluctance of government to take them on, and secondly due to complex new mineral rights legislation (effective partial nationalisation of minerals) and BEE ownership quotas which have made it near impossible for mining operations to function effectively, especially in a depressed commodities market. This has also caused South Africa to largely miss out on the China fuelled commodities boom of the early to mid 2000s. Politicians seem to be more concerned about doing things in order to be seen doing something (fighting perceived western imperialism in order to ‘share the wealth’ with the people) without considering the implications, which often affect the populace the most in an adverse way. The same could be said for agriculture. South Africa is now, embarrassingly, a net importer of food, despite having millions of hectares of arable land, and having been on of the breadbaskets of the world not so long ago. This decline is due to 3 reasons, all to do with government. Firstly, farm murders are unquestionably an epidemic in South Africa (while perhaps not being genocide quite yet). The disgraceful murders (often preceded by torture) have taken its toll on South African agriculture; there can be no farms without farmers. Secondly, government is too intimidated to confront unions about violent strikes and ludicrous wage demands. Bizarrely, in 2013, members of the ruling party in government openly supported the violent strikes and did nothing to discourage damage of property caused by striking farmers in the Western Cape (as part a ‘make the Western Cape ungovernable’ campaign – which failed). Thirdly, land reform and uncertainty around property rights. Many farmers have immigrated to the US, Australia or Zambia because they want to be sure that the government would protect their property rights. In South Africa, there is no certainty surrounding this issue. The vast majority of land reform thus far has been disastrous due to the lack of skills and training of new farmers who are simply given land. There are talks of ‘expropriation without compensation’. This does nothing for South Africa’s food security.

Fortunately however, our markets are free enough to have allowed capital to find its way to the services sector, which is doing well, albeit with a shortage of the educated people the sector needs. The resulting decline in international trade of resources and manufactured goods is concerning, considering the large potential labour force and space we have.

Fortunately (unfortunately for those in power) our markets are also just about free enough to allow capital to leave the country. There are no concrete figures telling us how much capital has left South Africa in recent times, but I suspect it is at record highs.

“There is a serious tendency towards capitalism by the well-to-do peasants” – Mao Zedong

3. High debt and leverage

The sums don’t add up.

The South African government has a budget of R1.35T for 2015. Of this, almost 10% goes to paying interest on the debt outstanding. South Africa is adding public debt amounting to 3.8% of GDP in 2015. The government intends on balancing the budget by 2018.

For a start, they won’t be able to balance the budget, since doing so (under the Keynesian philosophy) would require a robust economy showing organic growth. The world economy probably won’t be growing by 2018, and that of South Africa certainly won’t be growing.

So, money will need to be spent on things like social grants, SOC bailouts and other social services to keep the populace happy and to maintain any semblance of a functioning economy with a competent public sector.

Where will this money come from?

Government only has 3 sources of funding:

1. Taxation – Government taking from productive individuals to fund its operations. This is already at its limits. 1.1 million South Africans contribute 69% of all income tax, meanwhile approximately 19 million receive social grants. Increasing the tax rate only places more strain on taxpayers, and won’t necessarily lead to greater proceeds, especially if economic growth is stagnant.
2. Debt – Government issuing interest bearing bonds. Our bonds are currently only marginally above ‘junk’ status. This means that if our economy, and government finances were to start deteriorating faster, there is a real possibility that rating agencies will downgrade our bonds to junk status. At this point, pension funds and investment managers around the world will be obligated to sell our bonds. A massive dumping of our bonds will cause yields (interest rates) to sky rocket, this will also have a massive negative effect on the value on our currency. This means that any new debt issued after this point will be issued at much higher interest rates in order to justify the increased risks of inflation or a default. So it is uncertain for how much longer our government can continue racking up debt.
3. Money printing – Printing money, physically or digitally: The favourite final play of the failed African state. This is very detrimental for obvious reasons, and usually comes along with other forms of government tyranny.

So it’s clear that ideology can only take you so far. When the money runs out, all hopes and dreams of a massive domineering state crashes back into reality.

In this respect, South Africa is very fragile as to how our country is perceived by our international creditors. We can only hope that someone in government (there are certainly people who understand what is happening) pull up the handbrake as we are picking up speed and rolling downhill towards the cliff.

“We must make a radical turn, at 360 degrees.” – Todor Zhikov

4. Political variability

South Africa is a de facto one party state. This sounds peculiar, since South Africa has a ‘strong constitution’, and a ‘transparent voting process’. This is true, but how relevant is it? We claim to be the front-runner of liberal democracy in South Africa, but how true is that claim? For each of the five post-94 elections we’ve had, everybody has known with virtual complete certainty that the ANC would win with a comfortable majority. Barring a ‘black swan’ type shock, we know with the same level of certainty that the ANC will get the most votes in the next election, but will they get the majority needed to form a government, or will South Africa experience a foray into the uncharted territories (in an ethnically diverse country as SA) of coalition politics? We have for 25 years had effectively no variability in our politics (bar the Mbeki/Zuma drama of the mid 00s). We have for 21 years had only one party in office, with 4 different presidents, each beholden to the same special interest groups (mainly the unions, and those who look to enrich themselves at the public’s expense). Italy for example, has had 14 prime ministerial terms over the past 25 years. South Africa has been met with failure and corruption at every level of government, yet somehow the ruling party’s support has barely dwindled. The risk is that due to some (un)foreseen shock (debt downgrades, fiscal problems, monetary problems, electricity supply problems, water shortages, broad public discontent, another Marikana etc.), the government loses popular support to the DA or EFF, and as a result becomes tyrannical as other governments throughout history have done. If it were to become clear to the government that there is a risk that they may lose their majority (even by a narrow margin), they will not hesitate to call off or rig elections in order to stay in power and keep the special interests happy. At this point the country will be in crisis. The mere fact that a scenario like this can be envisioned with a not-low probability, and not be deemed crazy shows how little variability there is in the top level of South African politics. South Africa has not had a real change in government for many years, this makes us fragile to shocks, as we might not be able to weather shocks as well as we would have wished.

“The trouble with free elections is you never know who is going to win” – Leonid Brezhnev

5. Handling of past shocks

How fragile had South Africa been to past shocks?
This is one area where South Africa can seemingly hold its own, with many shocks throughout its history, and surviving all of them more or less (the country has never been dumped into anarchy, and has always rebounded after it had dealt with crisis).

Our country has a ‘rich’ history of past shocks:

– Conflicts between Dutch and French settlers
– The Great Trek
– The influx of immigrants upon the discovery of gold and diamonds
– The Anglo Zulu and Anglo Boer wars
– Scorched earth and concentration camps
– World War 2 rationing of food
– Political disagreements in the Smuts era
– The apartheid policy
– The assassination of Verwoerd
– The transition to democracy

Our country has always been very resolute, with people going through difficult times, and in many cases seeing only the fittest survive. There is however a trend of people becoming more and more sensitive to shocks and discomfort, an all round decline in resilience and toughness. It is interesting to see the non-linear (perhaps even inverse) relationship between misery and discontent in South Africa, where the average South African has a better standard of living than anytime in history, yet we seem to have a growing discontent with things like leadership and perceived inequality in our society.

One of the main reasons South Africa survived the crises of the late 80s and the transition in the early 90s with ‘relatively’ little bloodshed and disruption was due to the intelligence of the ANC old guard at the time. They had fought in the struggle, they were fairly aware of how the world worked, and consequently dumped the antiquated Afro-Socialism that the likes of Steve Biko and Chris Hani advocated. What makes today different is the fact that most of today’s leftist young angry and black activists do not live in the real world. Contrary to what they might tell you, they have never fought in any struggle, and they aren’t oppressed. Most have never had real jobs. Throughout history, the people drawn to mass movements have been those who have very little self-esteem, and a low sense of self worth, creating the urge to find some sense of purpose in the collective. These people appear to have no sense of how the world works and simply don’t have the maturity or experience that the likes of Nelson Mandela and Cyril Ramaphosa showed during negotiations. Whether these people, who are the loudest voices in politics (although not representing the majority) will grow up and ‘come to the party’ in the event of a crisis remains to be seen.

“People that bite the hand that feeds them usually lick the boot that kicks them” – Eric Hoffer

Conclusion

South Africa is not a ‘hell hole’ as some may have you believe. People who are willing to work hard can still (for now) get ahead in life. We have some of the best schools and private healthcare in the world. A middle class family in SA can have a quality of life that billions can only dream of.

The South Africa of today simply does not have the same backbone that it had 20 or 120 years ago. A fish rots from the head, and South Africa is in effect a country without solid leadership. The ship has no captain and it is headed for stormy seas.

South Africa can be rated as having a high level of fragility.

“One does not establish a dictatorship in order to safeguard a revolution; one makes a revolution in order to establish a dictatorship.” – George Orwell